Positioning Views of Competitive Strategy - Assignment for Executive MBA Competitive Strategies

1. Positioning views of competitive strategy
Assignment for part-time MBA Competitive Strategies, week 2
By Gulcin Askin, Michelle Donovan, Kivanc Ozuolmez and Peter Tempelman
9/9/2012
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2. The sources of performance of a company have been subject to research for more than fifty
years. Various schools of thought have tried to determine what these sources are. From the
viewpoint of determining the strategy of a company, knowing what these sources are very
important, because if the source of performance is identified, the strategy of a firm can be
formulated accordingly.
Conner (1991) discusses five schools of thought within industrial organization economics
through a historical perspective to provide a comprehensive understanding of the elements
forming the resource based approach. Starting with the neoclassical model, the main
assumption of which is the existence of a perfectly competitive market, firms are producing
identical products at the point where marginal cost equals to marginal revenue. Accordingly,
performance differences among firms are attributed to technological, managerial and scale
factors. Secondly, Bain-Type IO theory is analyzed, which links performance differences
with market dominance based on monopolistic power by using the examples of Great
Depression of 1929-1941. Additionally, Mann (1966) argues that firm size, in other words
producing large portion of total supply in the market, also matters in terms of gaining
persistent above-normal returns that can also be interpreted as a strengthening factor for
monopoly control. On the other hand, distinguished from neoclassical and Bain Type IO
theories, Schumpeter deals with competition as a dynamic concept rather than a static one.
According to him, improvement in the market position is highly depending on innovative
investments which support monopoly power and consequently enhance the size and scale of
the firm. While Bain Type IO and Schumpeter theories emphasize monopolistic power as one
of the main drivers of higher performance of a firm, on the contrary, the Chicago Response
disagrees with the sustainable formation of collusion due to high costs to maintain and
monitor it. Instead, the Chicago Response attempts to explain the performance differences
between firms by bringing the terms of efficiency in production and distribution onto the
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3. Avanade as a joint venture
between Microsoft and
table. In order to improve, firms should be able to reach inputs
Accenture widely practices
and distribution channels which enable them to reduce costs
the Resource-Based approach
thus vertical integration is attached significant importance by
to be a high performer in the
the Chicago School. Additionally, the Chicago School deems
competitive IT consultancy
efficiency as an initial circumstance for the expansion of size
market. Avanade values its
and scope of a firm. After this, the theory of Coase and
people and knowhow, and
Williamson is examined by Conner which expresses the
builds an asset base of
importance of decreasing costs arising from transactions
resalable / reusable tools
executed in the market. By applying vertical integration and
from every project it realizes.
coordination within the firm, assembling different operations
This approach leads Avanade
under one umbrella until the marginal cost of an in house
to be distinctive in its
transaction equals the cost of executing it in the market, the
services and a strong
performance of the firm improves. Williamson (1975) discusses
competitor in the market.
that in case of having asset specificity, small numbers of
Additionally, by being a
potential transactors and imperfect information, a firm has an
venture by Microsoft and
opportunistic potential which implies that a firm would keep
Accenture, Avanade has
transactions which create additional costs in house to support
access to the wide sales
its market position.
channels of the parents’,
After elaborative discussion of above mentioned theories, internal or external services
Conner argues Resource Based Theory (RBT) which puts of the parents’ and most
uniqueness of the product value in the center of its argument. In importantly the knowhow
order to come up with a unique product, RBT combines the databases. From this angle,
innovative approach of Schumpeter and Chicago School’s Avanade is a very effective
proposal of having efficient production and results with the cost avoider
(Coase/Willamson). Case by
3 KivancOzuolmez.

4. An example of a firm
operating in an extremely
distinctiveness of inputs. RBT defends that high profit
competitive market, where
generation would be possible not by limiting the supply as
there is rapid innovation, and
Bain Type IO argues but by having uncopyable assets
customers and suppliers
(Rumelt, 1987).
(especially panel suppliers)
Rather than focusing and building up only onto one strategy have considerable bargaining
theory, Porter extends the theories and explains performance power, is TPV. One in three
as determined by the collective strength of the five monitors manufactured in the
competitive forces. Large scale production, vertical integration world is made by TPV. In
and dominance as the barriers to new entrants discussed by order to attempt to gain market
Porter are also focal points in Bain-type monopolization. share and increase
Especially in the markets where large initial investments are profitability, their recent
required for R&D, and the start-up losses are high, the power strategy has been to become
of monopoly plays important role for the firm to keep up more efficient by taking
revolutionary innovations and higher the barriers of potential advantage of synergies (e.g.,
new entrants, as discussed in Schumpeter theory and later merging the European sales
addressed by Porter. and back office of the Philips
and AOC brands to one
Porter discusses the importance of supply costs, especially in
location, Amsterdam, and
the case of powerful suppliers and says they can be
through combining, getting a
responsible for a firm’s potential profit decreases. Similarly
better deal from suppliers for
Coase and Williamson focus on internal cost avoidance, and
warehouse, forwarding, office
the Resource-Based theory, seeing a firm as an input-
rent). It is expected in the
combiner, seeks efficiency and low prices in the supplies.
coming years more synergies
Powerful buyers; be it due to price sensitiveness, bargaining
will be found because of the
power, etc.. may force the firm to lower prices, therefore profit
joint venture with Philips in
4 the TV business, TPV Vision.
Case by Michelle Donovan.

5. falls. As a strategic action, Porter suggests finding the buyers who possess the least power to
influence the prices - generally by distinctiveness of the product or the industry. Schumpeter
and later the Resource-Based theories also see a firm as in a continuous evaluation process
seeking and producing unique, high quality and competitive products.
Porter, in his view on the Substitute Products as another competitive force, extends
Schumpeter’s and Resource-Based theories’ approach to product uniqueness, and points out
that a product may be unique, however, if it’s replaceable by an alternative, then the market
for the firm might be more fragile than it looks.
Between all the threats of new entrants and substitute products, bargaining power of suppliers
and customers, a firm willjockey for position Porter adds, and to reduce the impact of
industry rivalry, Porter builds on Schumpeter theory and advices on focusing on selling
efforts in the fastest-growing industries or market areas with the lowest fixed costs.
Porter builds on all five of the theories compared by Conner to a greater or lesser extent. In
explaining the five forces which affect profitability, many elements had previously appeared
in earlier theories. Economies of scale are highly important in neoclassical theory and these
are mentioned by Porter as being a barrier to new entrants into an industry. Other barriers to
entry Porter describes are important points of Schumpeterian theory, namely differentiation
of product and investment in innovation, both of which larger firms are likely to be in a better
position to carry out according to Schumpeter, however Porter does not necessarily agree: he
believes newcomers can overcome this under certain circumstances. There are still more
barriers which Porter mentions, efficiency of a firm and knowledge, (both specialist
knowledge within the industry but also information customers have e.g. through advertising),
and the Chicago school had already observed that these are crucial; again Porter also sees
them as important barriers, but not as impossible to break down under certain conditions or in
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6. some industries. The Coase/Williamson view also emphasizes the savings which can be
increased due to increasing size and scope of a firm and also the impact of information and
specialism.
The other forces at work, according to Porter, the power of customers and suppliers as well as
the availability, quality and price of substitute products and the rivalry between competing
firms, are also discussed by Schumpeter, who emphasizes the importance of pushing rivals
out of the market by innovating. Bain-type IO also sees the size of a firm and the position
adopted by a firm relative to its competitors as the most important factors in a firm’s
performance. In building on some elements from each school of thought, Porter combines
them and adds to them to create a more detailed theory to explain differences in performance
among firms and how these differences can be used to create competitive advantage.
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7. Case: Instead of fighting
To summarize, Porter’s position on what influences the
competition in the arena of post-
performance of a firm can be derived from the
initial education, e.g. by starting a
characteristics Porter deems critical to the strength of five
price war, the Amsterdam School
competitive forces: threat of entry, changing conditions,
of Real Estate (ASRE), more and
powerful suppliers & buyers, substitute products and
more tries to join forces with
jockeying for position (Porter, 1979). Brandenburger
organisations that (may) offer
built upon these five forces and drafted the ‘Value Net’
similar studies. By joining forces a
(Brandenburger and Nalebuff, 1995). Both Porter’s five
win-win situation is achieved.
forces and Brandenburger’s ‘Value Net’ describe the way
These organisations, whose core
various actors interact with each other in a competitive
business typically is not education,
industry. By analyzing the position of a company relative
are able to offer high quality studies
to the surrounding forces or actors (e.g. suppliers,
to their customer base. The ASRE
changing preferences of customers) strategists can
in return can tap into a new group
determine the most beneficial position of their company
of potential students that may have
in the industries’ ‘competition arena’. Porter’s five forces
otherwise not considered the ASRE
seem to reflect his view on competition as something that
and new knowledge flows into the
should always be battled, i.e. a negative. In Porter’s view,
ASRE. Also, the other
winning implies that a competitor loses, somewhere
organisations do not feel the need
within the five forces framework (Porter, 1979, p. 141).
to offer a study themselves which
A company either wins, or loses. Brandenburger and
could, from a commercial
Nalebuff on the other hand introduce the term
perspective, result in two barely
‘coopetition’ (Brandenburger and Nalebuff, 1995, p. 59).
sustainable studies (which would
Coopetition refers to a situation in which a company not
constitute a ‘lose-lose’). Case by
only looks for ‘win-lose’ situations, but also considers
Peter Tempelman.
‘win-win’ situations. It is not a given that improving
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8. one’s performance automatically comes at the expense of others. By looking for ‘win-win’
situations, companies may find opportunities that would have otherwise been missed.
This paper aims to provide an overview of sources of performance, as suggested by various
authors. We have also tried to link (parts of) these theories to our own experiences at the
companies we work at.
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